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The specter of Japan keeps looming over the U.S. economy and its fixed-income markets.

Once an economic juggernaut, Japan famously faltered through a 1990s "lost decade" of stagnation after its real-estate bubble burst. That bled into a second lost decade of deflation, and into the current decade, which isn't looking great, either. A zero-interest-rate policy and ongoing Bank of Japan intervention cut the yield on Japanese 10-year bonds to a pathetic 0.69% last week, undermining a nation known for its savers, while the economy remains hamstrung by an aging population and flagging consumer demand.

Since the U.S. housing bubble burst, waves of Federal Reserve rate-cutting and stimulus have fueled worries that the U.S. is heading down Japan's path toward economic stagnation and a possible liquidity trap. As rates hit new lows, a growing percentage of Americans are nearing retirement age and increasingly need bond income.

THE 10-YEAR TREASURY YIELD ended last week at 1.625%, versus 1.613% the Friday before. Although Fed stimulus has yet to produce significant inflation, Treasury yields already trail the current pace. The three-decade bond bull market hasn't turned bearish yet, but it's just about run out of room to go any further.

Investors should consider the recent comments of several bond-fund managers looking ahead to next year and beyond and facing two competing scenarios: an inevitable eventual rise in rates, which would hurt prices of existing bonds, or a protracted period of income-killing low rates.

"It's hard to make an argument for capital appreciation for the next 10 years," says Joe Balestrino, chief fixed-income market strategist at Federated Investors. "Bond investors have to lower their expectations."

Next, from Thomas Chow, of the
Delaware Corporate Bond
Fund (ticker: DGCAX): "The math just doesn't work out that [corporate bonds] can continue to generate double-digit returns from this starting point. That doesn't mean we can't be in a low-interest-rate environment for an extended time."

On the muni front, here's Oppenheimer Funds' Dan Loughran: "After four straight really strong years for munis, investors shouldn't straight-line that expectation out into the future. Next year, coupon-clipping is going to make up most of the outcome, and for individual investors that might not sound too thrilling, given where rates are."

And this from Pimco's Bill Gross, in his latest investment outlook: "Investors should expect future annualized bond returns of 3% to 4% at best, and equity returns only a few percentage points higher."

FOR NOW, THE U.S. SITUATION doesn't look as bad as Japan's recent history.

"It's everything that happened in Japan, but not as severe," says John Lonski, chief economist at Moody's Capital Markets Research. "For next year, you're probably looking at 2% real growth, a 2% 10-year Treasury yield, and 2% inflation. I don't see where the U.S. economy is going to strengthen anytime soon to where it can shoulder a 10-year Treasury yield of 3% or higher."

Still, there remains such demand for bonds, even near record-low yields, that Barclays forecasts another $1 trillion in investment-grade corporate issuance next year, nearly matching this year's record volume. Just over half of that will be new issuance, with the rest consisting of bonds issued to refinance older bonds with higher coupons. Thus will yield continue to be squeezed from bond markets.

For income investors, Lonski says, it seems that all the longer-term risks are to the upside. Any jump in interest rates would impose losses on bond portfolios, but probably would accompany gains in economic growth, boding well for everyone.

Absent such growth, rates have little catalyst to move higher. Let's hope it won't take decades for that to happen.